Global Calls for Economic Justice: the potential of Islamic finance - - PowerPoint PPT Presentation

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Global Calls for Economic Justice: the potential of Islamic finance - - PowerPoint PPT Presentation

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2012 LSE-Harvard public lecture on Islamic Finance Global Calls for Economic Justice: the potential of Islamic finance Mukhtar Hussain Justice Cranston Chief executive officer, HSBC Malaysia Chair Professor Volker Nienhaus Visiting

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Global Calls for Economic Justice: the potential of Islamic finance

Mukhtar Hussain

Chief executive officer, HSBC Malaysia

Professor Volker Nienhaus

Visiting professor, University of Reading

2012 LSE-Harvard public lecture on Islamic Finance Suggested hashtag for Twitter users: #lseislamfin

Justice Cranston

Chair

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Global Calls for Economic Justice: The Potential of Islamic Finance

  • Prof. Dr. Volker Nienhaus

2012 LSE-Harvard public lecture on Islamic finance – London, 22 February 2012

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Outline

  • 1. Economic Justice: Concepts and Calls
  • 2. The Potential of Islamic Finance
  • 3. Realities of Islamic Finance
  • 4. Drivers of Conventionalisation
  • 5. Activation of Potentials
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Economic Justice: Concepts and Calls

1

[Discussion of] Principles (abstract) in

  • Religious teachings
  • Christianity
  • Islam
  • …
  • Religious movements (e.g. liberation

theology, Muslim brotherhood)

  • Human/Civil rights movements
  • Green parties
  • Political uprisings (Arab spring)
  • Occupy movements (OWS)

20th century

2011

  • Economic theory
  • Welfare economics
  • Public Choice
  • Game theory
  • …
  • Political philosophy
  • Natural law
  • Libertarianism
  • …

for against [Calls for] Action (concrete) by

  • Growing inequality

(total wealth US 20/87%)

  • (Youth) Unemployment
  • Political system

(authoritarian, inactive)

  • Unbridled capitalism

(excessive debt, socialising losses, impoverishment of the middle class)

  • Employment and income
  • pportunities
  • Minimum wages/living

standard

  • Fairness, dignity
  • Financial system reform
  • Poverty alleviation
  • Social security
  • Health, housing, education
  • Participatory justice

(opportunities, procedures)

  • Distributive justice

(outcomes)

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Islamic economic system

The Potential of Islamic Finance

2

  • Growing inequality

(total wealth US 20/87%)

  • (Youth) Unemployment
  • Political system

(authoritarian, inactive)

  • Unbridled capitalism

(excessive debt, socialising losses, impoverishment of the middle class)

  • Employment and income
  • pportunities
  • Minimum wages/living

standard

  • Fairness, dignity
  • Financial system reform
  • Poverty alleviation
  • Social security
  • Health, housing, education
  • Participatory justice

(opportunities, procedures)

  • Distributive justice

(outcomes) Prohibition of

  • Riba
  • Gharar
  • Maysir

Islamic banking

  • Solidarity

(Takaful)

  • Zakat
  • Waqf
  • Private property with social obligation
  • Fair competition
  • Basic infrastructure and social services

Shari’ah

Islamic capital market

  • Equity (stocks, VC)
  • Sukuk

Superior allocation, distribution, systemic stability

  • Finance for real economy
  • Support for entrepreneurs
  • Mobilization of savings
  • No reward without risk
  • Participatory finance

(no collateral, SMEs)

  • No speculation
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The Potential of Islamic Finance

2

  • Growing inequality

(total wealth US 20/87%)

  • (Youth) Unemployment
  • Political system

(authoritarian, inactive)

  • Unbridled capitalism

(excessive debt, socialising losses, impoverishment of the middle class)

  • Employment and income
  • pportunities
  • Minimum wages/living

standard

  • Fairness, dignity
  • Financial system reform
  • Poverty alleviation
  • Social security
  • Health, housing, education
  • Participatory justice

(opportunities, procedures)

  • Distributive justice

(outcomes) Prohibition of

  • Riba
  • Gharar
  • Maysir

Islamic banking

  • Finance for real economy
  • Support for entrepreneurs
  • Mobilization of savings
  • No reward without risk
  • Participatory finance

(no collateral, SMEs)

  • No speculation

Shari’ah

Islamic capital market

  • Equity (stocks, VC)
  • Sukuk

Superior allocation, distribution, systemic stability Claim or reality?

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Realities of Islamic Finance

3

Prohibition of

  • Riba
  • Gharar
  • Maysir

Islamic banking

  • Finance for real economy
  • Support for entrepreneurs
  • Mobilization of savings
  • No reward without risk
  • Participatory finance

(no collateral, SMEs)

  • No speculation

Shari’ah

Islamic capital market

  • Equity (stocks, VC)
  • Sukuk

Yes, but not always, and

  • Predominantly short-term trade finance (little impact on employment, income

generation, and poverty alleviation)

  • Longer-term finance mainly for real estate (= investments in bubble-prone and often

speculative markets)

  • Increasingly project financing for public infrastructure (little impact on domestic SMEs)
  • Little corporate finance, very little SME finance, hardly any participatory finance
  • Sophisticated techniques to minimize the risk that results from the use of trade/rent

contracts for financing purposes (e.g. customer as agent, purchase oders,

  • No financing without collateral
  • No evidence for additional net savings (deposits transferred from conventional banks)

questionable

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Realities of Islamic Finance

3

Prohibition of

  • Riba
  • Gharar
  • Maysir

Islamic banking

  • Finance for real economy
  • Support for entrepreneurs
  • Mobilization of savings
  • No reward without risk
  • Participatory finance

(no collateral, SMEs)

  • No speculation

Shari’ah

Islamic capital market

  • Equity (stocks, VC)
  • Sukuk

Results of contractual engineering:

  • Finance (largely or completely) detached from the real economy (e.g. tawarruq,

commodity murabaha, Islamic repos, asset based securities)

  • Development of Shari’ah compliant functional equivalents of conventional structured

products (options, swaps, plugs)

  • Prototypes of securities (derivatives) suitable for trading within the financial sector
  • Inadequate corporate governance structures (no voice for ultimate risk bearers:

investment account holders, takaful participants)

  • Systemic risks not fully recognized (e.g. threat of bank run due to ineffective deposit

guarantee schemes) Significant divergence between claims and realities of Islamic finance

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Drivers of ‘Conventionalisation’

4

Prohibition of

  • Riba
  • Gharar
  • Maysir

Islamic banking

  • Finance for real economy
  • Support for entrepreneurs
  • Mobilization of savings
  • No reward without risk
  • Participatory finance

(no collateral, SMEs)

  • No speculation

Shari’ah

  • Equity (stocks, VC)
  • Sukuk

Inroad of conventional financial institutions into a profitable market segment

  • Conventional mindset
  • Structuring expertise
  • Profitability of trading
  • Shareholder value
  • rientation

Islamic capital market Shari’ah scholars in board positions:

  • Main role: legal advisors
  • Board positions attractive (reputation, compensation)
  • Appointment by BoD/shareholders
  • Micro-legalistic approach
  • Lack of macro-systemic understanding
  • Pragmatism in the name of maslahah (public good)

Status quo as a challenge; ways forward?

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Activation of Potentials

5

Prohibition of

  • Riba
  • Gharar
  • Maysir

Islamic banking

  • Finance for real economy
  • Support for entrepreneurs
  • Mobilization of savings
  • No reward without risk
  • Participatory finance

(no collateral, SMEs)

  • No speculation

Shari’ah

  • Equity (stocks, VC)
  • Sukuk

Islamic capital market Product development

  • Participatory

finance with limited downside risk

  • Participation

certificates

  • accounts with

transparent risk/ return profile Regulation

  • Reconsider

systemic stability qualities of IF

  • Consumer

protection

  • Shari’ah

governance system Public awareness

  • Islamic economists
  • Financial literacy
  • Specialised media
  • Rating and ranking
  • Academic study

programs and research Market discipline

  • Best practice

examples

  • Performance

analysis

  • Islamic benchmarks
  • Competition (intra-

and inter-sectorial) Islamic economic system More distinctiveness from conventional finance and authenticity with a systemic perspective Growth potentials as ethical finance and socially responsible investment, contributing to economic justice (instead of complicated and restrained replication of conventional finance)

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Contact Details

  • Prof. Dr. Volker Nienhaus

Dachsfeld 38a 45357 Essen – Germany Tel: +49 (0) 201 8695750 Fax: +49 (0) 201 8695752 Mobile Germany: +49 (0) 176 63755466 Mobile UK: +44 (0) 7787 049649 volker.nienhaus@gmx.net

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Global Calls for Economic Justice: the potential of Islamic finance

Mukhtar Hussain

Chief executive officer, HSBC Malaysia

Professor Volker Nienhaus

Visiting professor, University of Reading

2012 LSE-Harvard public lecture on Islamic Finance Suggested hashtag for Twitter users: #lseislamfin

Justice Cranston

Chair